4 stocks for America's coffee addiction

These picks continue to gain amidst the seemingly insatiable demand for the nation's top hot drink.

By Traders Reserve Apr 18, 2014 9:17AM
File photo of a Dunkin' Donuts Inc. store in Midtown Manhattan (© Ramin Talaie/Getty Images)By Karen Riccio


It's not too late for investors to get their buzz from investing in the coffee industry. 


Coffee consumption --along with coffee profits -- continues to rise annually, and consumers show no sign of limiting their coffee habits.


Americans already drink an estimated 400 million cups a day, about one out of every four cups consumed on the planet, by some accounts. 

 

Some consumers may whine about the $5 cup of Starbucks -- but they keep buying, in higher numbers than ever before. Specialty coffee is the fastest-growing segment of the industry, and consumers continue to shift over to spendier gourmet coffee options. Some 34 percent of American adults now consume gourmet coffee beverages daily, up from 31 percent, last year, while daily non-gourmet coffee drinking is down to 35 percent from last year's 39 percent.


Plenty of companies are vying for the attention of coffee-loving consumers; investors have viable choices among a number of coffee stocks.  Here are four top contenders:

 

Ubiquitous Starbucks (SBUX)

As if one on every block isn't enough, Starbucks plans to open 1,500 new stores in fiscal 2014 with half of them in China and the Asia-Pacific region.

 

The Seattle-based chain has set the bar in terms of quality as the inventors of specialized coffee, and it's reaping the profits from the fast-growing segment.

 

Led by founder and CEO Howard Schultz, Starbucks grew from a small group of stores in Washington to more than 19,700 stores across the globe. The product quality combined with unique customer experiences helped make Starbucks one of the most valuable consumer brands in the world.

 

Starbucks is firing on all cylinders; revenues increased by 13 percent in the last quarter on the back of 588 new stores and a strong increase of 7 percent in global comparable-store sales. Earnings per share grew by 34 percent year over year to $0.63 per share.

 

China is Starbucks' next big market.  It wants to have 1,500 stores operating in 70 Chinese cities by 2015 and hopes to score with China's burgeoning middle class, which has growing disposable income.  By 2015, China is expected to become Starbucks' second-largest market.

 

Green Mountain (GMCR) and Nestle (NSRGY)

At least for now, single-serve home-brewed coffee is one of the industry's hottest segments; and Nestle's Nespresso, with a 70 percent share of the market in Europe, is hoping to give Keurig Green Mountain (formerly named Green Mountain Coffee Roasters) some competition in the U.S. and Canada.


North America is second-largest in the $8 billion single-serve market, trailing only Europe. Nespresso produces espresso shots, something that Americans have yet to embrace over larger cups or entire pots of coffee, so it could take time to make any kind of dent in this market.

 

Green Mountain dominates the U.S. single-serve market; it has a 72 percent share compared to Nestle's 3 percent share. As a result of consumer interest in this market, Green Mountain experienced 80 percent growth in pod sales from 2011 to 2012.

 

Up 32 percent year-to-date, Green Mountain recently signed a 10-year exclusive deal with Coca-Cola (KO) to carry the beverage maker's products in the new Keurig Cold machine. Under terms of the $1.25 billion deal, Coca-Cola will buy a 10 percent equity stake in Green Mountain.

 

Donuts and Loyalty: Dunkin' Brands (DNKN)

When it comes to customer loyalty, Dunkin' Brands is the envy of the bunch, an intangible that may help the company close the gap among other retail brewers. It's ranked highest on the Customer Loyalty Engagement Index for three consecutive years, with Starbucks coming in second each time. The listed reasons are crafted beverages, quality and taste, menu selection, value and location.


Dunkin' Donuts is expanding in the U.S. and plans to open about 400 new stores this year, with 15 percent to 20 percent of those locations in the West. The company has around 7,500 Dunkin' Donuts restaurants in the U.S., and management believes it has room to double that amount to nearly 15,000 locations in the country.

 

Dunkin' Donuts appears to be standing on solid ground financially as well. Looking ahead to 2014, it estimates revenue growth between 6 percent and 8 percent, and an increase in earnings per share of 17 percent to 20 percent from fiscal 2013.

  

More from Traders Reserve


 

1Comment
avatar
Coffee will only get bigger with Millenials here. Just like me, the Gen X'ers, we love our coffee and were raised on Dunkin' Donuts. The Millenials seek the atmosphere of Starbucks. The new (Decade or so) of seasonal coffees like ice coffee in the Summer and warm coffee in the winter, it's always year round. Dunkin' will stay around due to its taste and development, Starbucks will only grow bigger. People aren't afraid to spend $5 for a cup of coffee, they look forward to it. I'd love to own a coffee shop.
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